How Are Gains on Gold ETF Taxed?
Taxation can be an unfamiliar concept when it comes to commodity investing, so having an idea of which forms you must fill out and which rates apply can save investors plenty of headaches come April.
Gold ETFs offer an easy way to invest in precious metal without dealing with physical bullion directly, but the IRS treats this form of investment differently than other assets.
Gold can be an attractive investment option for those who think its prices will appreciate over time, but investors must understand its tax treatment to maximize after-tax returns. While stocks and mutual funds typically incur maximum capital gains rates of 20%, physical gold ETFs subject to tax at up to 28% due to being treated as collectibles.
Gains on non-physically backed gold ETFs are subject to capital gains tax rates of between 0%-20%; investors should consult an accountant in order to ascertain any tax implications of investing in such an ETF.
Physical gold coins or futures-based gold ETFs may provide higher after-tax returns than investing in gold funds, since latter only receive long-term capital gains treatment after three years (SGBs are eligible only after eight). However, annual costs such as storage fees and buying and selling expenses may reduce any after-tax returns regardless of type.
Gold ETFs that track physical precious metals or are backed by physical gold are taxed differently than stocks, bonds and other investments; any gains from such ETFs are treated as short-term capital gains as they won’t have been held more than 12 months before being sold or invested elsewhere.
Investors in commodity-based ETFs that invest in futures contracts must receive a K-1 form when selling shares and are subject to taxes that combine 60% long-term and 40% short-term capital gains rates, higher than the usual 20% maximum rate applied across all assets.
ETFs backed by physical gold are considered collectibles for tax purposes, meaning investors could face up to a maximum tax rate of 28% on any gains realized from trading these ETFs or ETNs. Investors should consult an accountant when considering investing in any particular gold ETF or ETN.
Gold ETFs structured as commodity funds that aren’t physically backed by precious metal have different tax treatment than ETFs that invest directly in physical quantities of precious metal, like those structured as mutual funds. Gains on these investments are taxed as collectibles with an upper tax rate of 28% for gains; significantly higher than the 15% long-term capital gains tax rate which most investors face.
Investors in ETFs that contain these kinds of securities are sometimes surprised by the large tax bill they incur when selling shares, so knowing which type you own can help ensure that any unexpected tax bills don’t derail your financial plans.
Gold ETFs that hold futures contracts will report their investment gains using Form K-1 instead of Form 1099, making these products less susceptible to the 20% maximum tax rate for collectibles. Furthermore, this structure may lower storage and insurance costs and make these products more appealing to investors.
Taxes on Collectibles
One of the key components of investing is understanding its tax ramifications. A surprising tax bill could wreak havoc with your returns; but with careful overall investment planning you can lower it significantly.
Physical gold investments made outside an IRA are taxed as collectibles and any gains will be subject to the maximum 28% capital-gains rate for collectibles. You can avoid this tax burden by investing in ETFs that track gold prices rather than directly investing in physical metal.
Many gold ETFs are structured as open-end funds and don’t store precious metal, opting instead to use futures contracts as their tracker – which avoids tax issues associated with physically held precious-metal ETFs. When selling shares of these ETFs you won’t receive either a K-1 form or 1099; they are taxed according to normal short and long term capital gains rates, though investors should consult their tax professional before investing.
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